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Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View


NancyBush is a veteran bank analyst. The following does not constitute investmentadvice, and the views and opinions expressed in this piece are those of theauthor and do not necessarily represent the views of S&P Global MarketIntelligence.

Well, here we go with yet another story of bankingindustry ambition and the push to be the biggest, or the best, or the mosthighly valued bank — or to be seen as the smartest guys (and occasionally thesmartest woman) in the room. I thought that we had left all that stuff behindin the wake of the Financial Crisis, and that with the withdrawal from thepublic eye of major figures like Ken Lewis and Dick Fuld and Sandy Weill — anda host of lesser luminaries — the era of "overweening ambition" (a.k.a.hubris) had come to a welcomed end.

Not quite, apparently. We did have the "Londonwhale" incident back in 2011 to 2012 — in which traders in 's Londonoffice pursued an aggressive strategy of "hedging" with creditdefault swaps and managed to dig a $6 billion hole in the process. That episodeput a major (but not lasting) ding in Jamie Dimon's reputation as the King ofWall Street and led to the requisite resignations, pay clawbacks and forfeitures,congressional hearings, recriminations from regulators, etc., etc. And due tothat large faux-pas — as well as to a scary episode of throat cancer — Mr.Dimon was muted for a while, but has now returned as the industry's mostknowledgeable spokesman and as the reputed possible savior of the Italianbanking industry.

Who could have known that it would be — whichbilled itself as the bank of "the real economy" and had been longseen as the safest of the major banks — that would reveal one of the industry'sbiggest "hubristic events" in years, one which threatens not only itsexistence in its present form but that of its peer banks as well? And foranybody who is pooh-poohing this as a minor tempest in a teapot, I wouldsuggest that you heed the words of Congressman Jeb Hensarling (R-Texas) to JohnStumpf during his appearance before the House Financial Services Committee:"This is only the beginning…" You got that right, brother.

How, and why, do these things keep happening in thebanking industry? While other industries are certainly not scandal-free — and Iwould point to the VW emissions mess as the non-financial analogy to what isnow happening at Wells Fargo — the fact that banks are supposedly regulated bymultiple agencies and are subject to almost unceasing scrutiny (especially atthe very large end), makes it hard to see how in this era of New Banking Normalthis type of multiyear, multiregional and millions-of-accounts scam wentundetected for so long. The sheer scale and duration of the Wells Fargo fraud —and it is that, in no uncertain terms — is what has us all (regulators andinvestors alike) so shocked and will likely result in further harsh punishmentfor both the company's senior managers and its shareholders.

The prevalence of hubris in banking was certainlyeasier to understand in the old days — the late 1990s through the advent of theFinancial Crisis — as it was almost solely related to the consequences of dealsthat were overpriced, done hastily, and never fully rationalized before thenext merger target came along. And if there was a "Capital of Hubris"in the last go-round, it had to be Charlotte, where the hubristic tendencies ofseveral generations of CEOs at Bankof America Corp. and Wachovia (a.k.a., First Union)  came to a crashing end in 2008. It seems inretrospect to have been a consequence of too many large egos in too small a jar,and I'm sure that Harvard Business School will be studying that subject foryears to come.

Anyone who has ever seen me give my standardpresentation on the banking industry will recall a slide toward the end of thedeck where I discuss the elements that make banks successful, or not. Lacking a"widget" — i.e., a distinctive or unique product — the success of abank is determined by the culture that has been nurtured there over generationsof managers and employees, and in my view, the only way to change that cultureis to change the CEO. (And as I also say, sometimes even that doesn't work.)

While Brian Moynihan may not be everyone's idea ofan inspirational leader, the cultural turn that he has effected at Bank ofAmerica has gone a long way toward redeeming that company in the eyes of theinvesting world. While the culture there is now distinctly un-flashy and hasbecome almost geeky with regard to product delivery — a change that does notsit well with some in Charlotte who wish to see their city regain globalbanking dominance — it has produced a company that is vastly less risky and onethat gains in delivering earnings sustainability with each passing quarterlyreport.

John Stumpf of Wells Fargo — called the"Labrador Retriever of Wall Street" in one recent press article — hadbeen seen to be guarding a culture at that company that was indeed centered onselling products and on increasing those sales results over time. But what wenow know — that the company may have been abetting a fraud to make those salesgains happen — seems so at odds with what I have experienced in my interactionswith him and other senior managers there (including Carrie Tolstedt) that Imust admit that I am still having trouble wrapping my head around this thing. Ihope that the investigation that has been opened by the Board there will bemade known to the public as soon as it is completed and that the answers tosome big questions (like why it took so long to get the scam stopped) willbecome more apparent.

Did the sales culture that John Stumpf inheritedfrom Dick Kovacevich — a pretty good salesman in anybody's book — overtakecommon sense? Did the adulation (and valuation) that Wells Fargo received inthe wake of the Wachovia deal spur John Stumpf and Carrie Tolstedt to try tokeep the momentum going, whatever it took, including turning a blind eye tosketchy practices? Did having the largest market cap among the major banksbecome the be-all and the end-all of management direction?  And finally, with the elimination ofcross-selling goals on October 1, what will become the new cultural touchstonefor the new post-sales era?

John Stumpf's resignation (forced or otherwise) fromthe top of the company now seems to me to be a given at this point, and thenthe question of who becomes the next CEO will gain huge importance. I do thinkthat it will be possible for an insider — if there is one who emerges untaintedfrom all of this — to bring the company into a new phase of its existence. ButI think it must be someone who is willing to step back, to talk honestly andopenly with the employees, and to engage with customers at every turn. And thisperson must be willing to devote a year (or two) to a reputation-rebuildingprogram even as regulatory negotiations and recriminations continue to swirl.

Or, if this board is really smart, they will ante upmillions and millions of dollars, send Warren Buffett to Minneapolis, andpersuade (on bended knee, if necessary) Richard Davis of — perhaps the cleanest andleast-hubristic banker in the industry today — that it's time to come home toCalifornia. As a shareholder, I am totally down with that.

Listen: Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Mar. 20 2019 — Some fintech companies are making hay with digital platforms that tout their differences with banks, even though they are often offering virtually the same products. In the episode, we discuss with colleagues Rachel Stone and Kiah Haslett the deposit strategies employed by the likes of Chime, Aspiration and other incumbent players such as Ally Financial, Discover and Capital One. Those efforts conjure up memories of a Don Draper pitch in Mad Men and likely will enjoy continued success.

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Technology, Media & Telecom
Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot


The segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Mar. 20 2019 — The U.S. broadband-only home segment logged its largest net adds on record in 2018, validating Comcast Corp.'s and Charter Communications Inc.'s moves to make broadband, or connectivity, the keystone of their cable communication businesses.

The size and momentum of the segment also put in perspective the recent high-profile online-video video announcements by the top two cable operators as well as AT&T Inc.'s WarnerMedia shake-up and plans to go toe-to-toe with Netflix in the subscription video-on-demand arena in the next 12 months.

We estimate that wireline broadband households not subscribing to traditional multichannel, or broadband-only homes, rose by nearly 4.3 million in 2018, topping the gains from the previous year by roughly 22%. Overall, the segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

For perspective, broadband-only homes stood at an estimated 11.3 million a mere four years ago, accounting for 13% of residential cable and telco broadband subscribers.

The once all-powerful, must-have live linear TV model, which individuals and families essentially treated as a utility upon moving into a new residence, increasingly is viewed as too expensive and unwieldy in the era of affordable, nimble internet-based video alternatives. This has resulted in a sizable drop in penetration of occupied households.

As a result, continued legacy cord cutting is baked in and broadband-only homes are expected to continue to rise at a fast clip, with the segment's momentum in the next few years compounded by Comcast's, Charter's and AT&T's ambitious moves into online-video territory.

Note: we revised historical broadband-only home estimates as part of our fourth-quarter 2018, following restatements of historical telco broadband subscriber figures and residential traditional multichannel subscriber adjustments.

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Q4'18 multichannel video losses propel full-year drop to edge of 4 million

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Q4'18 multiproduct analysis sheds more light on video's fall from grace

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Watch: Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

Mar. 19 2019 — Steve Piper shares the outlook for U.S. power markets, discussing capacity retirements and whether continued development of wind and solar power plants may mitigate the generation shortfall.

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Credit Analysis
2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View

Mar. 15 2019 — On November 20, 2018, a joint event hosted by S&P Global Market Intelligence and S&P Global Ratings took place in London, focusing on credit risk and 2019 perspectives.

Pascal Hartwig, Credit Product Specialist, and I provided a review of the latest trends observed across non-financial corporate firms through the lens of S&P Global Market Intelligence’s statistical models.1 In particular, Pascal focused on the outputs produced by a statistical model that uses market information to estimate credit risk of public companies; if you want to know more, you can visit here.

I focused on an analysis of how different Brexit scenarios may impact the credit risk of European Union (EU) private companies that are included on S&P Capital IQ platform.

Before, this, I looked at the evolution of their credit risk profile from 2013 to 2017, as shown in Figure 1. Scores were generated via Credit Analytics’ PD Model Fundamentals Private, a statistical model that uses company financials and other socio-economic factors to estimate the PD of private companies globally. Credit scores are mapped to PD values, which are based on/derived from S&P Global Ratings Observed Default Rates.

Figure 1: EU private company scores generated by PD Model Fundamentals Private, between 2013 and 2017.

Source: S&P Global Market Intelligence.2 As of October 2018.

For any given year, the distribution of credit scores of EU private companies is concentrated below the ‘a’ level, due to the large number of small revenue and unrated firms on the S&P Capital IQ platform. An overall improvement of the risk profile is visible, with the score distribution moving leftwards between 2013 and 2017. A similar picture is visible when comparing companies by country or industry sector,3 confirming that there were no clear signs of a turning point in the credit cycle of private companies in any EU country or industry sector. However, this view is backward looking and does not take into account the potential effects of an imminent and major political and economic event in the (short) history of the EU: Brexit.

To this purpose, S&P Global Market Intelligence has developed a statistical model: the Credit Analytics Macro-scenario model enables users to study how potential future macroeconomic scenarios may affect the evolution of the credit risk profile of EU private companies. This model was developed by looking at the historical evolution of S&P Global Ratings’ rated companies under different macroeconomic conditions, and can be applied to smaller companies after the PD is mapped to a S&P Global Market Intelligence credit score.

“Soft Brexit” (Figure 2): This scenario is based on the baseline forecast made by economists at S&P Global Ratings and is characterized by a gentle slow-down of economic growth, a progressive monetary policy tightening, and low yet volatile stock-market growth.4

Figure 2: “Soft Brexit” macro scenario.5

Source: S&P Global Ratings Economists. As of October 2018.

Applying the Macro-scenario model, we analyze the evolution of the credit risk profile of EU companies over a three-year period from 2018 to 2020, by industry sector and by country:

  • Sector Analysis (Figure 3):
    • The median credit risk score within specific industry sectors (Aerospace & Defense, Pharmaceuticals, Telecoms, Utilities, and Real Estate) shows a good degree of resilience, rising by less than half a notch by 2020 and remaining comfortably below the ‘b+’ threshold.
    • The median credit score of the Retail and Consumer Products sectors, however, is severely impacted, breaching the high risk threshold (here defined at the ‘b-’ level).
    • The remaining industry sectors show various dynamics, but essentially remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 3: “Soft Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

  • Country Analysis (Figure 4):
    • Although the median credit risk score may not change significantly in certain countries, the associated default rates need to be adjusted for the impact of the credit cycle.6 The “spider-web plot” shows the median PD values for private companies within EU countries, adjusted for the credit cycle. Here we include only countries with a minimum number of private companies within the Credit Analytics pre-scored database, to ensure a robust statistical analysis.
    • Countries are ordered by increasing level of median PD, moving clock-wise from Netherlands to Greece.
    • Under a soft Brexit scenario, the PD of UK private companies increases between 2018 and 2020, but still remains below the yellow threshold (corresponding to a ‘b+’ level).
    • Interestingly, Italian private companies suffer more than their Spanish peers, albeit starting from a slightly lower PD level in 2017.

Figure 4: “Soft Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

“Hard Brexit” (Figure 5): This scenario is extracted from the 2018 Stress-Testing exercise of the European Banking Authority (EBA) and the Bank of England.7 Under this scenario, both the EU and UK may go into a recession similar to the 2008 global crisis. Arguably, this may seem a harsh scenario for the whole of the EU, but a recent report by the Bank of England warned that a disorderly Brexit may trigger a UK crisis worse than 2008.8

Figure 5: “Hard Brexit” macro scenario.9

Sources:”2018 EU-wide stress test – methodological note” (European Banking Authority, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies“ (Bank of England, March 2018).

Also in this case, we apply the Macro-scenario model to analyze the evolution of the credit risk profile of EU companies over the same three-year period, by industry sector and by country:

  • Sector Analysis (Figure 6):
    • Despite all industry sectors being severely impacted, the Pharmaceuticals and Utilities sectors remain below the ‘b+’ level (yellow threshold).
    • Conversely, the Airlines and Energy sectors join Retail and Consumer Products in the “danger zone” above the ‘b-’ level (red threshold).
    • The remaining industry sectors will either move into or remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 6: “Hard Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

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  • Country Analysis (Figure 7):
    • Under a hard Brexit scenario, the PD of UK private companies increases between 2017 and 2020, entering the intermediate risk band and suffering even more than its Irish peers.
    • Notably, by 2020 the French private sector may suffer more than the Italian private sector, reaching the attention threshold (here shown as a red circle, and corresponding to a ‘b-’ level).
    • While it is hard to do an exact like-for-like comparison, it is worth noting that our conclusions are broadly aligned with the findings from the 48 banks participating in the 2018 stress-testing exercise, as recently published by the EBA:10 the major share of 2018-2020 new credit risk losses in the stressed scenario will concentrate among counterparties in the UK, Italy, France, Spain, and Germany (leaving aside the usual suspects, such as Greece, Portugal, etc.).

Figure 7: “Hard Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

In conclusion: In Europe, the private companies’ credit risk landscape does not yet signal a distinct turning point, however Brexit may act as a pivot point and a catalyst for a credit cycle inversion, with an intensity that will be dependent on the Brexit type of landing (i.e., soft versus hard).

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.
2 Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
3 Not shown here.
4 Measured via Gross Domestic Product (GDP) Growth, Long-term / Short-term (L/S) European Central Bank Interest Rate Spread, and FTSE100 or STOXX50 stock market growth, respectively.
5 Macroeconomic forecast for 2018-2020 (end of year) by economists at S&P Global Ratings; the baseline case assumes the UK and the EU will reach a Brexit deal (e.g. a “soft Brexit”).
6 When the credit cycle deteriorates (improves), default rates are expected to increase (decrease).
7 Source: “2018 EU-wide stress test – methodological note” (EBA, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies”. (Bank of England, March 2018).
8 Source: “EU withdrawal scenarios and monetary and financial stability – A response to the House of Commons Treasury Committee”. (Bank of England, November 2018).
9 As a hard Brexit scenario, we adopt the stressed scenario included in the 2018 stress testing exercise and defined by the EBA and the Bank of England.
10 See, for example, Figure 18 in “2018 EU-Wide Stress Test Result” (EBA November 2018), found at:

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2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Market-Driven View

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